Approximate relationship when there is Interest Rate Parity: I - i = (F - R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i - i = F/R - 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i = 1.0134, a foreign interest rate of 22.5% is written i* = 1.225. Note that you may be asked to enter answers as percentages, though.
Suppose that the rupee (the Indian currency) depreciates against the dollar. Given this effect only (that is, all else the same), one could predict a rise in U.S. tourists visiting India, and a fall in U.S. investors buying stock in Indian firms. (Hint: a depreciation of the rupee means that one U.S. dollar can buy more rupees.)
- rise; rise
- rise; fall
- fall; rise
- fall; fall
- None of the above.